Lembo raises warning flags on new state budget

State Comptroller Kevin P. Lembo raised some early warning signs Thursday in his first monthly report on the new state budget.

Connecticut’s chief fiscal watchdog warned both about uncertain income tax projections and hefty savings targets — both of which must be met to keep in balance the $19.7 billion budget Gov. Dannel P. Malloy and the legislature approved in May.

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Comptroller Kevin Lembo

“The biggest source of revenue volatility” in the budget involves the income tax, and specifically the quarterly filings that reflect capital gains and other investment earnings, as well as much of the income from Connecticut’s financial services sector, Lembo said.

“Those workers have earnings closely tied to Wall Street and in turn, their tax payments are subject to the ebb and flow of the stock market,” the comptroller wrote in his monthly report. “We will have a more complete revenue picture once quarterly payments owed (on Sept. 15) have been accounted for.”

The Malloy administration reported in late June that it had downgraded expected income tax receipts for the outgoing fiscal year by $75 million, and sales tax revenues by $28 million.

And since prior year’s tax receipts are a crucial factor used to project likely revenues in the following year, the new forecast probably lowers expectations for the 2016-17 fiscal year.

Lembo also expressed some concern about the spending side of the budget.

Legislators set very aggressive savings targets for the executive branch to achieve once the fiscal year was underway. Nearly $190 million in efficiencies and other cost-savings were built into the budget this way.

But one key cost-saving measure has gotten off to a slow start.

The governor announced in April he expected to eliminate 2,500 state jobs by mid-June. The bulk, about 1,900 to 2,000 would come from layoffs, and the remainder from retirements in the final three months of the 2015-16 fiscal year.

A mid-June deadline was set, Malloy said, to ensure the state could reap the savings from these job cuts both during the last two pay periods of the outgoing fiscal year and during all of 2016-17.

But to date the administration has ordered just 825 Executive Branch layoffs. Combined with 239 layoffs ordered by the Judicial Branch, that’s 1,064 permanent positions — about half of what the governor projected.

Spring retirements compensated for some of that shortfall. According to Lembo’s office, fewer than 1,000 retirement requests have been filed since April 1.

Still, that means layoffs and retirements combined are more than 400 positions shy of the target the governor had hoped to reach back in mid-June.

Another 492 layoffs are planned at the Department of Developmental Services. But most of those won’t happen until after Jan. 1.

Further complicating matters, Lembo warned officials Thursday not to count on a roaring state economy to fix everything. Connecticut continues to recover jobs lost in the Great Recession, but still lags behind the national average.

“We remain on a relatively slow path to recovery,” said Lembo. “The state is adding back jobs, but has yet to achieve the type of wage growth required to jump-start the economy.”

“It is too early to draw conclusions this early in the fiscal year,” the comptroller added. “Increased growth throughout the economy and diligent monitoring of state expenses will be required to maintain a balanced budget moving forward.”

The top Republican in the House of Representatives, Minority Leader Themis Klarides of Derby, who has been very critical of the policies of the legislature’s Democratic majority, looked for a more definitive assessment of the state’s fiscal problems Thursday from the Democratic comptroller.

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House Minority Leader Themis Klarides

“The comptroller said the budget is ‘approximately’ in balance but, conveniently, we won’t have a clearer picture until the middle of November – after the elections,” Klarides said. “We must remember that the non-partisan Office of Fiscal Analysis projected this spring that we are looking at $2.7 billion budget hole in the next biennium.’’

Though the state’s fiscal year begins on July 1, the comptroller’s July and August reports address finances in the outgoing fiscal year.

On paper, the $17.9 billion General Fund, which covers the bulk of operating costs in the overall budget, was designed to run $22.7 million in the black. And Lembo did not project any change in that balance in his first report.

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Keith, with Jacqueline Rabe Thomas, won first prize in investigative reporting from the Education Writers Association in 2012 for a series of stories on the Board of Regents for Higher Education. The former State Capitol bureau chief for The Journal Inquirer of Manchester, Keith has spent most of 24 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut's transportation and social services networks. A former contributing writer to The New York Times, Keith is a graduate of and a former journalism instructor at the University of Connecticut. E-mail him at kphaneuf@ctmirror.org.